I got a letter stating that since these accounts are under $500, they can liquidate the accounts with a 10% federal income tax and additional 10% penalty for being under 59 1/2. I do not really want to throw more money at a bad investment by keeping the balance above $500.

There isn't enough of a loss to actually deduct. If you close all ROTHs, it is possible to include the loss as a miscellaneous deduction on Schedule A but only the amount of miscellaneous deductions over 2% of your income is actually deductible. With an original contribution of $1,000 and some current value, your loss can't be extremely large. Unless you are already itemizing and have other miscellaneous deductions of 2% of your income, the deductibility of the loss isn't going to change your tax liability.

The account balance is below your contribution amount. Contributions to a ROTH can be withdrawn at any time without penalties or taxes. Income taxes and penalties applies to amounts over your contributions. You can ignore that part of the issue. You will receive 1099-Rs for the distributions, which require that you report the distributions and offseting contributions on your income tax return.

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